Over the past twelve months, R100 invested in Richemont would now be worth, well, slightly more than R100. The net outcome may sound boring, but there’s been plenty of volatility along the way. The current share price is R170, with a 52-week high of R250.44 and a 52-week low of R147.34. There’s a lot of action in that range.
In the year to date, Richemont has dropped more than 28% as valuations cooled off globally. The underlying business hasn’t cooled off, though — the latest quarterly sales update is telling a great story.
Before we get into that, let’s talk about that valuation. Because of the depository receipt structure, you need to remember that 10 Richemont depository receipts on the JSE are equivalent to one A share. If you forget this, the dividend yield will look as though Richemont is priced for bankruptcy. There’s a rather large difference between a yield of 33.3% and one of 3.33%. The latter is the trailing yield if the special dividend is included. If you exclude it, the yield is 2.3%.
Diluted earnings per share in the 2022 financial year was €3.611, or about R62 at the spot exchange rate at the time of writing. We must remember to multiply the share price by 10 to give us a p:e of 27.4. This is still a hefty multiple, especially after a 28% drop this year.
Luxury brands like Richemont trade at high valuation multiples because they enjoy a loyal client base of people who may have 99 problems but money ain’t one. There are timepieces and jewellery that can easily cost more than a Porsche 911, let alone the family hatchback that most people have in the garage.
In this market, it’s all about getting the trends right and maintaining highly desirable brands. The resultant margins are delicious; gross margins run from 60% to almost 70%, depending on which luxury goods firm you look at.
If the retail strategy can be delivered successfully, it becomes transformative for margins and the returns to shareholders
Last Friday Richemont released a strong sales update for the quarter ended June, reflecting sales growth of 20% at actual exchange rates and 12% in constant currency. With incredibly strong sales in the US (22% of group sales in this quarter), Richemont sits on the right side of the recent dollar strength.
The company is pushing hard with its retail strategy (vs wholesale), allowing Richemont to capture the full margin in the value chain and own the customer experience. This is exactly what I’ve seen from other retail businesses like Nike, Levi’s and especially Lululemon, which was built that way from the start.
If the retail strategy can be delivered successfully, it becomes transformative for margins and shareholder returns.
In this quarter, retail segment sales were about 58% of total sales. The online retail segment was 17.3% of the total. If we bundle these together as “direct to consumer” (the term used by US retailers), more than 75% of sales are generated that way. This makes Richemont a powerful business, as it reaches most of its customers directly. The rest of the income is disclosed as wholesale and royalty income.
Both major divisions contributed strongly to sales, with jewellery maisons up 20% and specialist watchmakers up 18% (both at actual exchange rates — that is, as reported). Covid is still affecting the business, though, with Asia Pacific down 15% vs the comparable quarter last year in constant currencies. I use the constant currency number in this case to give an idea of the ongoing effect of the pandemic on volumes.
The influence of Covid in China is hitting all luxury businesses. The difference is the extent to which these businesses depend on China. For example, Burberry has released a first-quarter update in which sales would’ve been up 16% if it were not for China. Instead, they were up just 1%, as sales in mainland China fell by 35% year on year. Interestingly, Burberry noted a slowdown in US sales, which certainly hasn’t been Richemont’s experience.
The most comparable group to Richemont is arguably LVMH, which has a market cap that is nearly six times larger than that of Richemont. Half-year results are due on July 26. In the three months to March, organic revenue growth was 23%. The watches and jewellery division grew 24% as reported, or 19% on a constant currency basis.
Richemont investors will study LVMH’s results closely. The performance in the US will be relevant and so will the effect of restrictions in China. And in case you’re wondering, LVMH is trading on a p:e of 25.5. The share price is down 16.3% this year. The customers may not be price sensitive, but investors sure are.
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